State-owned banks slipped in lending to priority sector: RBI

Despite the central bank emphasizing that all commercial banks in India must make efforts to provide basic financial services to the 41% unbanked population in India, public sector banks have fallen short of their yearly lending target to the priority sector for the first time in four years.

The 2006-07 annual report of the Reserve Bank of India (RBI) states that public sector banks “fell short of their 40% priority sector target by 0.4%.”

This is despite the various technology initiatives, such as the introduction of credit cards for the farmers and opening of no-frills accounts or accounts needing no minimum balance.

RBI stipulates that public and private sector banks must lend 40% of their net bank credit to agriculture, small- scale industries, small road and water transport operators, private retail traders with a turnover up to Rs10 lakh per year, professional and self-employed people, and extend education and housing loans in rural and semi-urban areas.

Put together, loans made to these segments are defined as “priority sector lending” in banking parlance.

According to RBI, foreign banks have a lower limit and are required to lend 32% of their net credit to the priority sector.

As of March 2007, six out of 28 public sector banks could not meet the target set for them by the central bank.

RBI, however, did not divulge the names of the banks.

The banks missed their target because of a shortfall in agricultural lending, sources at the central bank confirmed.

Among the 89 million farmer households in India, 51.4% households have no access to formal or informal sources of credit according to RBI data.

A general manager looking after the priority sector of a Mumbai-based public sector bank, who did not wish to be named, said that in fiscal 2007, banks were concentrating on lending more aggressively to the industrial sector. This is because many Indian corporations required money for capital expansion plans and that led to the agricultural sector to lag behind.

Data published in the RBI annual report reveals that though their reach does not match up to the national footprint of public sector banks, private sector banks lent 42.7% of their net credit to the priority sector, while foreign banks lent 33.4% of their net bank credit to the same segment.

“It is possible that public sector banks were concentrating more on lending to small and medium enterprises as a sector, resulting in a shortfall in direct agricultural lending,” said Sarika Lohra, a banking analyst at Angel Broking Ltd.

Lohra, however, said the banks have now identified the opportunities in lending to farmer households and expressed optimism that the volume of bank credit will rise during the current financial year.